Rebates are powerful tools for increasing cooperation between trading partners and driving margin growth, but they have to be deployed and managed effectively. This means developing incentive schemes that maximize value for both partners, effectively managing the rebate strategy, and most importantly, understanding the numbers. When supply chain partners calculate optimal sales volumes, product mixes, etc., they will be capable of building rebate structures that help them achieve ambitious growth targets.
Successful rebate strategies require visibility. Partners need to understand what they want to achieve, whether that’s growing profit, product reach, market share, etc. Then, they need to choose the right kind of rebate to support that action. But before any plan is implemented, partners should also run the math to ensure the rebate type and the execution plan will ultimately support their objective at a commercially viable cost of doing so.
There also needs to be communication between partners (and departments, such as sales and accounting) to ensure alignment on the rebate strategy. When suppliers and buyers focus on developing and maintaining a data-driven rebate program, they will improve their margins and build healthier long-term relationships.
Rebates are more customizable than simple incentives like discounts, which is why they have an excellent track record of helping companies lock in profits and remain competitive. But it isn’t enough merely to have a rebate program in place – partners need a thorough understanding of the numbers underpinning that program to maximize the value of rebates for both parties.
Visibility and alignment are crucial
Suppliers and buyers can’t fully leverage rebates without visibility. When partners negotiate rebates, they should agree on mutual objectives and targets for optimal performance. For example, let’s assume partners have agreed to a retrospective framework that will provide a pre-specified rebate on all transactions in the quarter if a certain purchasing threshold is reached. This deal only makes sense if it meets objectives for each trading partner, so both partners have to run the numbers and validate the activity and rebate will deliver against their mutual objectives. Once a rebate strategy is in place, it needs to be regularly monitored to ensure that it continues to meet objectives.
Supply chain visibility has been a core focus for the past several years, with over two-thirds of leaders in the sector implementing dashboards for end-to-end visibility. Effective rebate management demands visibility as well – it’s essential to know how a rebate platform will affect margins for both parties, as this platform should always incentivize ongoing cooperation.
Getting the numbers right
A comprehensive understanding of demand trends, potential margins, and a wide range of other variables is vital to develop a profitable rebate strategy that benefits both the company and its customers. This may seem overwhelming at first, but these calculations are necessary and must be integrated into existing processes to create a rebate program. Too many companies instead ignore this step of the process as they are blinded by the prize of just winning the sale. This makes the development and implementation of a profitable rebate strategy far more difficult.
The creation of an incentive scheme requires robust analytical tools that allow partners to easily gather, share, and evaluate data. One key advantage of rebates over discounts is their capacity to account for a wider range of variables. As rebate strategies become more sophisticated and complex, it’s increasingly important to move beyond manual processes that could lead to costly errors, create silos within and between companies, and hinder the decision-making process.
There are many numbers supply chain partners have to calculate to determine which rebate strategy will lead to the best financial outcomes. Does the supplier want to increase sales volumes or margin? Does the buyer have a desire to grow their purchase volume with that supplier in that product range? Does it make more sense to promote add-on products? Suppliers and buyers should ensure their objectives are aligned. This alignment helps create a budget for the rebate program itself and maximize the value of their rebate strategy.
Managing your rebate strategy effectively
Rebates allow companies to forge stronger relationships with their partners and secure an array of financial goals. But many companies fail to take full advantage of rebates because they have not calculated the financial impact. . Partners need to carefully analyze their rebate programs to ensure that mutual objectives are being met and the rebate program itself is beneficial to both sides of the partnership.
There are three pillars of a rebate strategy: SMART, commercial considered, and manageable. Rebate strategies should be built SMART: Specific, Measurable, Achievable, Relevant, and Time-bound. When rebates are commercially considered, they take into account the commercial reality of a business and the markets that business operates in, aligning strategy to financial reality, such as considering the impact on profit margins. Finally, rebate strategies should be manageable: the strategy should be designed such that both parties can execute on it. The strategy should not place undue burden on either side, and should provide a framework that promotes collaboration, mutual benefit, and long-term business relationships.
